Beware the dangers lurking in Asia

By Rashmi Kumar

09 Jan 2020

Asia’s debt and equity markets made a roaring start to 2020, with dollar bonds flooding the market and companies lining up for IPOs. But the first few days of the new year have also shown that issuers, capital markets bankers and investors should be prepared for some nasty surprises.

Last year threw up many obstacles for financial markets globally. In Asia, those challenges took the form of slowing economic growth in a number of countries, a complete revamp of the supply chain industry owing to trade tensions between the US and China, anti-government protests across Hong Kong and in some parts of India, a credit crunch in India and a spike in the number of defaults in mainland China.

None of those issues is behind us yet but if there’s one thing that 2019 taught markets, it’s the benefits of flexibility.

For instance, during one of the worst weeks for anti-government protests in Hong Kong, DCM bankers and issuers showed their agility by closing bookbuilding and pricing bonds earlier than usual. When non-banking financial companies in India were facing a funding crisis onshore, some of them ventured to the international bond market instead, placing dollar bonds with global investors. That trend has also continued into 2020.

Despite the host of challenges last year, the Asian markets proved incredibly resilient. On the bonds side, 2019 was a stellar year for high yield debt issuance, with novel names entering the market. G3 high yield bond volumes stood at around $97bn last year, nearly double the volume of around $50bn recorded in 2018, shows Dealogic.

On the equities front, the Hang Seng Index managed to close 2019 up 12%, overcoming turbulence that saw the benchmark whipsaw for a big part of the year.

But 2020 will have something different in store for Asia’s capital markets. And if the first week of the year is any indication, the road ahead will be bumpy.

On the global front, tensions between the US and Iran have risen dramatically, after the US assassinated Iranian military commander Qasem Soleimani. Iran retaliated by launching ballistic missiles at US forces in Iraq. US stocks have taken a hit, oil prices have soared and the Middle Eastern markets have turned volatile.

While Asian markets typically tend to turn a deaf ear to global geopolitical noises — thanks mainly to their self-contained nature — investors and bankers are nevertheless closely watching the developments, over fears a war could kick off between the US and Iran.

Closer to home, there are plenty of worries looming.

In India, a new controversial citizenship law has fuelled religious tensions across the country, with demonstrators taking to the streets. Over the weekend, masked men launched an attack on a famous university in the capital New Delhi. While some reportedly said the attack was unrelated to the citizenship law, others claimed the attackers were closely tied to India’s nationalist ruling party. The benchmark S&P BSE Sensex Index is lower by 1.4% in the year to January 8.

Furthermore, growth in the country is slowing, and access to credit onshore is hampered.

In Hong Kong, anti-government protests took centre stage on January 1, the eighth straight month of demonstrations in the special administrative region. The tensions have hit growth in the SAR, and raised concerns around the status of Hong Kong as a key financial hub in Asia.

The US-China trade relationship continues to be a key focus, despite the fact that the two countries are scheduled to sign a phase one trade deal on January 15.

But 2020 has also started with China’s relationship with the UK coming under the microscope. GlobalCapital Asia understands China brought the London-Shanghai Stock Connect to a temporary halt for political reasons.

The connect, which allows cross-border listings between the Shanghai and the London bourses, has so far just been used by Huatai Securities, which sold global depositary receipts in London in June last year. According to multiple sources, the recent suspension followed criticism from the UK government over how Hong Kong authorities and the police tackled the demonstrations in the SAR. Sources told GlobalCapital Asia that the link had been suspended, however the China Securities Regulatory Commission has reportedly denied halting the service.

These are just some of the latest troubles to come to light in only the first week of 2020. More new problems are likely to emerge, while older concerns — including rising defaults in China and a slowdown in growth — remain and can wreak havoc on issuers’ debt or equity raising plans.

Last year, capital markets bankers and issuers had to be flexible, jump on issuance windows when they came, and be realistic about their expectations. In 2020, they will need to be even more adept.